A number of changes have been made to the Small and Medium Companies (SME) R&D and VRR tax relief schemes which will all take effect from 1 August 2008. This announcement sets out the changes and provides a brief overview of how they will work. Further more detailed guidance is currently being prepared and will be published in the HMRC Corporate Intangibles and Research and Development (CIRD) manual shortly.
Schedule 20 to Finance Act 2000 provides for tax relief for companies that are small or medium enterprises (SMEs) undertaking qualifying R&D activities. Schedule 12 to Finance Act 2002 provides for tax relief to large companies undertaking qualifying R&D activities. Schedule 13 to Finance Act 2002 provides for tax relief for companies of all sizes carrying out vaccine research. These reliefs are in the form of an enhanced deduction in respect of qualifying expenditure which reduces the tax payable or increases the tax losses arising. In some circumstances, SME companies can surrender their losses in return for a payable tax credit.
The UK’s SME R&D and VRR schemes are notified state aids. Those schemes, and any changes them, must be approved by the European Commission (EC) before they can take effect. Following discussions with the EC, and a number of consequential amendments to the SME R&D and VRR scheme rules, we have now received EC approval for changes to these schemes to:
1 August 2008 has been designated as the appointed day from which all these changes will take effect.
Statutory Instruments have recently been issued which give effect to HM Treasury Orders in respect of each of the changes above, and to the other amendments we have made. A link to each Statutory Instrument is contained in the details below of each change.
Section 28 Schedule 2 of Finance Act 2006 introduced changes which allow for relief in respect of relevant payments to the subjects of a clinical trial. For the purpose of the legislation a 'relevant payment' in relation to a subject of a clinical trial, means a payment made to him for participating in the trial.
Relief under the SME R&D and VRR schemes is due in respect of clinical trial payments incurred on or after 1 August 2008.
Section 50 of Finance Act 2007 provided for the extension of the SME R&D tax relief to mid-sized companies, or 'larger SMEs' as they are referred to in the legislation.
Companies are entitled to R&D relief for an accounting period if they qualify as an SME in the period. Paragraph 2 of Schedule 20 of Finance Act 2000 defines an SME for this purpose and links to the European Commission Recommendation 2003/361/EC of 6 May 2003, references in the legislation to the Annex are to the Annex of the Recommendation.
Finance Act 2007 amended the definition of an SME for UK SME R&D and VRR tax relief purposes only and as a result of this, references in Article 2(1) of the Annex to 250 persons, 50 million euros and 43 million euros are to be read as references to 500 persons, 100 million euros and 86 million euros respectively.
The extension of the SME R&D relief to mid-sized companies will have effect in relation to expenditure incurred on or after 1 August 2008.
Budget 2007 announced an increase in the rate of R&D relief for all companies. Legislation in Finance Act 2008, Section 26 and Schedule 8, provides for this increase. The relief for SMEs increased from 150 per cent to 175 per cent and relief for large companies increased from 125 per cent to 130 per cent. The increase for large companies is effective in respect of expenditure incurred on or after 1 April 2008.
Due to the need for EC approval, the increase for SMEs is effective in respect of expenditure incurred on or after 1 August 2008.
In order to ensure that the SME and VRR schemes remain consistent with State aid requirements, the amount of relief available under the VRR scheme will be reduced for all companies from 50 per cent to 40 per cent. The reduction on the VRR rate of relief is effective in respect of expenditure incurred on or after 1 August 2008.
Section 27 to Finance Act 2008 makes a number of changes to the types of expenditure that qualify for R&D and VRR relief.
The first of these widens the definition of staff costs to include the compulsory contributions paid by a company in respect of benefits for its directors or employees under the social security legislation of an EEA State, other than the UK (for which relief is already provided by the R&D and VRR rules), or Switzerland.
This change will widen the relief that all companies, irrespective of their size, can claim under the R&D and VRR schemes and the change will take effect in relation to expenditure incurred on or after 1 August 2008.
The other two changes provided for by this section affect only the VRR
scheme rules but will apply to all companies claiming relief under the
The first of these amends the VRR subcontracting rules to remove the special rules that apply when companies subcontract to charities, universities and scientific research organisations. Subcontracting payments incurred on or after 1 August 2008 to charities, universities and scientific research organisations will be subject to the same VRR scheme subcontracting rules as all other subcontracting payments.
The second change removes relief under the VRR for payments made towards the cost of independent research undertaken by charities, universities and scientific research organisations. No relief will be available for such payments incurred on or after 1 August 2008.
Section 28, and Schedule 9, to Finance Act 2008 introduces new rules which prevent 'companies in difficulty' from claiming tax relief under the SME R&D or VRR schemes.
For the purpose of these rules a company will be regarded as being 'in difficulty' if its latest published accounts are not produced on a going concern basis. A company will also be prevented from claiming relief if its going concern status is based on the expectation of it receiving SME R&D or VRR relief or tax credits.
If a company ceases to be a going concern after making a claim to SME R&D or VRR relief it will be treated as if the claim had not been made and the company will receive no tax relief or tax credit payments.
This treatment will take effect in relation to claims made on or after 1 August 2008.
Section 29, and Schedule 10, to Finance Act 2008 introduces a cap of €7.5 million on the total amount of SME R&D and VRR aid a company can receive in respect of a particular R&D project.
The legislation contains a calculation which must be used by companies to calculate the total amount of aid they have received in respect of an R&D project.
The cap will only have effect in respect of expenditure incurred on or after 1 August 2008 and the calculation need only be applied to that expenditure.
Section 30 to Finance Act 2008 introduces a requirement that large companies claming VRR relief must make a declaration about the effect of the relief.
All VRR claims made by large companies on or after 1 August 2008 must include a declaration that the availability of the relief claimed has resulted in an increase in the amount, scope or speed of the R&D undertaken by the company, or in the company’s expenditure on R&D.